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Speculative securities

Author

Listed:
  • Marín, José
  • Rahi, Rohit

Abstract

A speculative security is an asset whose payoff depends on a random shock uncorrelated with economic fundamentals (a sunspot) about which some traders have superior information. In this paper we show that agents may find it desirable to trade such a security in spite of the fact that it is poorer hedge against their endowment risks at the time of the trade, and has an associated adverse selection cost. In the specific institutional setting innovation of futures contracts, we show that a futures exchange may not have an incentive to introduce a speculative security when all traders favour it.

Suggested Citation

  • Marín, José & Rahi, Rohit, 1997. "Speculative securities," LSE Research Online Documents on Economics 119175, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:119175
    as

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    File URL: http://eprints.lse.ac.uk/119175/
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    References listed on IDEAS

    as
    1. Rahi Rohit, 1995. "Optimal Incomplete Markets with Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 65(1), pages 171-197, February.
    2. Duffie Darrell & Rahi Rohit, 1995. "Financial Market Innovation and Security Design: An Introduction," Journal of Economic Theory, Elsevier, vol. 65(1), pages 1-42, February.
    3. James Dow, 2003. "Informed Trading, Investment, and Welfare," The Journal of Business, University of Chicago Press, vol. 76(3), pages 439-454, July.
    4. Hara Chiaki, 1995. "Commission-Revenue Maximization in a General Equilibrium Model of Asset Creation," Journal of Economic Theory, Elsevier, vol. 65(1), pages 258-298, February.
    5. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-574, September.
    6. Rohit Rahi, 1996. "Adverse Selection and Security Design," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 63(2), pages 287-300.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    information revelation; sunspots; security design; futures contract; trading volume;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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